New Wage Code 2021: How does it impact you?

25 Mar 2021  Read 2986 Views

How many of you found yourself financially able during the lockdown? If the lockdown had extended, do you think you’d have been ready to sustain yourself as well as your family comfortably? How well were you financially prepared to survive a layoff?

नहीं कर पाए ना answer?

This is exactly why the government has been trying to introduce new measures so that the citizens are financially well prepared for any more unforeseen situations like the COVID-19 pandemic.

A recent addition to a possible chain of measures is the introduction of the “New Wage Code”, which will ensure that each employee has a sufficient amount of savings in the form of provident funds. This new code which will be applicable from the beginning of the new financial year, April 2021. With the new policy in action, the salary structure for most of us will be changing.

According to the new wage code, your basic pay should at least be 50% of the total Cost to the company (CTC). But how will this impact your in-hand salary?

Let’s find out.

What does the new wage code say?

As per the new code, “Wages” will include components like basic pay, dearness allowance (DA), and other special allowances while excluding items like House Rent Allowance, bonus, overtime allowance, conveyance, and commissions.

These excluded items cannot be more than 50% of the total remuneration. If they cross 50% of the total remuneration, they will be added to the “wages” component. Your basic pay, DA and other special allowances (‘wage’) should be 50% of the CTC. This is your net monthly Cost to the Company (CTC).

Change in Basic Pay

So basically, earlier, your in-hand amount or basic pay was around 30-40% of the gross salary (CTC), and the rest consisted of the allowances. Now, the basic pay has to be at least 50% of the CTC so that the share of the allowances doesn’t exceed 50%.

Confused? Let’s see an example. Suppose you have a CTC of ₹20,000 per month. When you look at the salary breakup as per the previous wage code, you’d notice that around ₹6,000 is your basic pay, and the remaining ₹14,000 consists of allowances such as rent, bonus, overtime allowance etc. Now, with the new wage code, this basic pay will be increased to ₹10,000, and all the other allowances would have to be adjusted into the remaining ₹10,000.

Change in Provident Fund contributions and gratuity

Further, the provident fund amount, which is contributed both by the employee as well as the employer, is calculated on the basic pay. This means that now, the PF amount will be calculated on 50% of the CTC, thus increasing the PF share but decreasing the take-home (in-hand) pay.

Similarly, gratuity, which was earlier calculated as a % of your basic salary, will now increase as the basic salary rises. Gratuity is a monetary benefit given by the employer to their employee at the time of the end of employment.

How will this actually impact your salary?

Depending on the salary bracket, the take-home pay is set to be impacted by this new regime. The impact is expected to be higher in lower salary brackets as compared to the mid-and high-salary brackets.

In the case of a lower salary bracket, the basic pay doesn’t constitute much of the CTC. The new wage code will increase this basic pay amount, such that the PF and gratuity contribution also increases. This means that the take-home among will get reduced.

On the contrary, for the high-salaried individuals, basic pay is already around 50% of their CTC. Hence, their take-home pay might not be impacted as such.

However, you will be getting a higher payout during retirement, which is ultimately why this new code was implemented in the first place.

During the lockdown, while the people were suffering from a liquidity crunch, the government had allowed the withdrawal of provident funds to some extent. This PF withdrawal proved to be saviours for a lot of people during that time of financial crisis. Hence, it becomes all the more important for individuals like us to have our PF accounts so that we can safeguard ourselves during financial emergencies.

The new wage code has been introduced to secure the employee’s future by securing their Provident Fund, gratuity and pensionary schemes.

How can you be “salary-smart”?

From the tax perspective, you can either take advantage of all the exemptions or opt for the new tax regime.

But rules will come, and rules will go. The question is, how aware are you? How many times have you actually looked at your salary breakup?

Understanding the salary breakup can help you identify the various components of your salary and what your employer is actually paying for when it comes to allowances. However, the major driver towards understanding the salary break up is that it can help you plan your taxes in a much more efficient way.

So, as the new wage code sets its foot in your salary system, it’s time you change some old habits. This time, instead of taking a look at just your CTC, take a look at your “take-home” salary, plan your finances accordingly and become salary smart!

About the Author: Anuja Khandelwal | 31 Post(s)

Anuja Khandelwal is a finance content writer at Finology. With a bachelor’s degree in Management and a master’s in mass communication and journalism, Anuja started writing blogs as a hobby, which later turned into passion. Together, with her passion for writing and interest in Finance, she wishes to create unique infotainment through her words.

Liked What You Just Read? Share this Post:

Finology Blog / Ticker Talks / New Wage Code 2021: How does it impact you?

Wanna Share your Views on this? Comment here: